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Swing Vs Steady Assignment

The document analyzes the pricing and profitability opportunities for two manufacturing companies, Swing and Steady, if they lower prices to gain market share. Lowering prices could increase profits with market segmentation, but not if they must charge one price for all. Swing could gain $4,500 more profit from a 40% sales increase, while Steady would lose $1,500. Steady is better off maintaining its current market rather than withdrawing. Specializing production could earn Steady extra profit if it sells at least 3,500 units monthly.

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Vivek Singh
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901 views4 pages

Swing Vs Steady Assignment

The document analyzes the pricing and profitability opportunities for two manufacturing companies, Swing and Steady, if they lower prices to gain market share. Lowering prices could increase profits with market segmentation, but not if they must charge one price for all. Swing could gain $4,500 more profit from a 40% sales increase, while Steady would lose $1,500. Steady is better off maintaining its current market rather than withdrawing. Specializing production could earn Steady extra profit if it sells at least 3,500 units monthly.

Uploaded by

Vivek Singh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Swing vs Steady Assignment

VIVEK KUMAR SINGH

1.
Swing Steady
Sales 5,000 units 5,000 units
Price $10.00 $10.00
Variable $2.50 $5.50
Fixed Cost $35,000/month $20,000/month
Full Cost $9.50 $9.50
Current Profit $2,500/month $2,500/month

(a) If either company could costlessly segment the market for pricing (that is, charge the
15% lower price only to this new segment without undermining the prices charged to
current customers), how much additional profitability could each company earn by
achieving a 20% and a 40% increase in sales? Would you recommend that either or
both companies pursue this opportunity?

For swing manufacturing:


New P= (1-0.15)*10=$8.5
New CM= P-VC= 8.5-2.5=$6

Now we take into account the 20% increase in sales:


Increased number of sales= 5000*.2= 1000
Increased profit= 1000*6= $6,000

Now we take into account the 40% increase in sales:


Increased number of sales= 5000*.4= 2000
Increased profit= 2000*6= $12,000

For steady manufacturing:


New P= (1-0.15)*10=$8.5
New CM= P-VC= 8.5-5.5=$3

Now we take into account the 20% increase in sales:


Increased number of sales= 5000*.2= 1000
Increased profit= 1000*3= $3,000

Next, we take into account the 40% increase in sales:


Increased number of sales= 5000*.4= 2000
Increased profit= 2000*3= $6,000

Given the huge amount of increased profit in both the cases when compared to the fixed costs,
I recommend that both companies pursue this opportunity.

b) In fact, neither Swing nor Steady can effectively segment this market (each must charge
one price to everyone). Calculate the break-even sales changes for this opportunity for each
of them. Calculate the changes in profit for a 40% increase in sales. Briefly explain why this
answer differs from your answer in part a.

For swing manufacturing:


Delta P (Price change) = 8.5-10=-$1.5
CM=P-VC=10—2.5= $7.5

% BE sales change= (-Price change)/ (CM + Price change)


= -(-1.5)/(7.5-1.5)= 1.5/6=.25=25%

Unit BE Sales Change= % BE Sales change * Sales volume


= .25*5000= 1250

Net BE Sales= 5000+1250= 6250


Change in profit for 40% case= (2000-1250) *6= $4500

For steady manufacturing:


Delta P (Price change) = 8.5-10=-$1.5
CM=P-VC=8.5—5.5= $3

% BE sales change= (-Price change)/ (CM + Price change)


= -(-1.5)/(4.5-1.5)= 1.5/3=.5=50%

Unit BE Sales Change= % BE Sales change * Sales volume


= .5*5000= 2500

Net BE Sales= 5000+2500= 7500


Change in profit for 40% case= (2000-2500) *3= -$1500

The answer differs from answer in part a because here we are using a fixed pricing strategy for
the entire market segment. However, in part a , we charged the 15% lower price only to this
new segment without undermining the prices charged to current customers.
(c) Which competitor is better positioned to take advantage of this opportunity? Assuming
that neither company can segment the market, what advice would you give to Swing and to
Steady regarding this opportunity?

Swing is the early mover and is better positioned to take advantage of this opportunity. Swing is
managing to sell 7000 units even though it has reduced its price to $8.5
As we calculated earlier, we can see that Swing has a profit of
Change in profit for 40% case= (2000-1250) *6= $4500

My advice to Swing is to enter the new market and continue making profit. My advice to steady
is to not enter the new market and just target the old market as it would be facing a huge loss
of it decides to enter the new market.

(d) Was Steady's decision to cut price financially justified?

As per the financial analysis for Reactive pricing, we know that

Reactive pricing= Price Change/CM= -1.5/4.5= 1/3= 33.33%

This is the percent of sales the company can afford to lose if they don’t match the competitor’s
price cut.

However, as per the question, Steady's management believes that it would have lost at least
60% of its business had it failed to reduce its price.

Hence, we see that Steady's decision to cut price financially justified as a loss of 33.33 % is
much better than having a loss of 60%.

(e) Given the financial information that you have at this point, would Steady be better off to
withdraw from this market altogether?

Let’s consider both of them as two different cases and find out the net profit or loss in both the
cases.

Case A: Cutting price

Sales volume= 5000 (assuming it will be able to hit this sales target)
FC= 20000
profit= (8.5-5.5) *5000- 20,000= -$5000
Case B: withdraw from this market altogether

Sales volume= 0
FC= 20,000/2= 10,000
profit= (8.5-5.5)*0- 10,000= -$20,000

The company is incurring a loss in both the cases.


Steady be better off not to withdraw from this market altogether since it will incur a bigger loss
of $10,000.

(f) What is the minimum monthly unit sales that Steady would require to make it more
profitable as a specialty widget manufacturer than it is currently as a commodity
manufacturer?

Making specialized widgets sounds like an attractive plan worth switching since Steady was
incurring a huge loss in the above case.
Since now it could charge atleast $6 higher and we could also add $3 to the VC, we have the
new calculations as follows:
Price= $14.5
VC= $8.5
CM= P-VC= 6
New FC= 23,000 monthly
Profit has to be atleast a dollar extra than the earlier case.
So, profit= -$ 4999
Let no of units be x.
Also, Profit= 6* x – 23,000

Now, equating both we get:

x= (23,000- 4999)/6= 3000.16= 3000 ( almost)

So, 3000 is the minimum monthly unit sales that Steady would require to make it more
profitable as a specialty widget manufacturer than it is currently.

(g) How much additional profit would Steady earn as a specialty widget, given its minimum
case scenario of 3500 specialty units at a $6.00 price premium?

Now we are selling 3500 units instead of the 3000 units that we got in the previous part.
So, extra profit= (3500- 3000)* (14.5-8.5)= 500* 6= +$3000

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